Friday, November 23, 2007

Carbon intensive exporters to the US and EU take note

Consider the scenario where the EU and the US have accepted a cap on carbon emissions, while the rest of the developing world has not. Will these two blocs consider a border tax adjustment on carbon intensive production elsewhere? Given South Africa's very high carbon intensity and bulk of export markets to the EU this not such a far-fetched question.

Border taxes do have practical problems, but it seems that it may be considered as a real option.

The IPCC has the following to say on border taxes:

Application of border tax adjustments, such as import tariffs or export subsidies, while theoretically appropriate for reducing leakage, pose a number of practical problems. Determining the emissions associated with the manufacture of a particular product, hence the border tax adjustment, is likely to be very complex because of differences in the fuel mix and production techniques used in different regions. Furthermore, the appropriate border tax adjustments may not be compatible with current multilateral trading rules. Likewise, implementing production and consumption subsidies and taxes at the appropriate level in all cooperating countries, given the differences in their existing tax systems, is likely to prove practically impossible.

A working paper by Joost Eveleijn, Prof at Duke University, as referred to on the Carbon Tax Center blog does suggest that border taxes are possible and should not be ruled out to protect US competitiveness in the case of federal climate policy.

The main arguments are that

1. ...such carbon tax amounts to “border tax adjustment” explicitly permitted under WTO rules for product-related or indirect taxes (such as VAT or sales taxes). The carbon tax is then simply the extension to imported products of the tax or cost of holding emission allowances imposed on domestic, U.S. producers.
2. ...[a] carbon tax is justified under the environmental exceptions of GATT Article XX. This second line of defense is needed in case (i) the WTO would not permit “border tax adjustment” for a process-based tax or charge such as an internal, US carbon tax or cap-and-trade system or (ii) the WTO does permit “border tax adjustment” but the adjustment is found to discriminate imports as against US products or between different sources of imports (in case, for example, the US would not impose the tax on countries, such as Europe, with their own emission cuts in place, or exclude very poor developing countries).

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